Tuesday, August 31, 2010

On August 14, 2010 in this blog I warned about the increasing flood of transients, drug addicts, prostitutes, runaways, street hustlers, and other alcoholics and vagrants normally lumped together as "homeless" in downtown Seattle.

I said the idea of having small town tourists mingle on the downtown streets and in the tourist traps of the city with mentally ill individuals talking to themselves and drug addicts high on meth, crack, heroin, and a half dozen other drugs was not a wise idea. It was costing the city BIG TIME in the area of public relations and tourism. Not to mention stagnant real estate prices and just a feeling of decline in the city. I called it that "Taxi Driver" kind of moral decay, from the famous film. That same sense of dread. Who wants to live in a warzone when the streets are not safe at night? Where the doorway to your home smells of urine? When men and women live under plastic tarps on the sidewalk, beg for money on virtually every street corner, and bring about a desperation and decline aurora even on the brightest of days?

Well, yesterday an officer of the Seattle Police shot to death a homeless man in the center of downtown Seattle about three blocks from the Convention Center. Apparently this man, a homeless alcoholic who supported his addiction by making and selling wood carvings to tourists refused to put down his whittling knife when asked to by police. What I can say is that I'm sorry a man is dead. I'm also disgusted that the City of Seattle for a long time has thought it is safe and acceptable for a homeless alcoholic to be living on the streets of the city carving wood with a big knife in the center of the business district.

The streets of my neighborhood used to be safe, even at night. Now they are threatening during the day, let alone after dark where rolling open air drug markets take shape at will, and prostitutes ply their trade in the many alleyways of the area, and homeless men and women of all shapes and conditions make the doorways and dumpsters their private homes. Read about how other people feel.

The City of Seattle should be ashamed. The tourists who visit the city have plenty of stories to report when they return home, and far too many these days start with the words "Never again...."

I'm not going to rehash the debate here. What I can say about the whole controversy is simple.

I was at the rally on Saturday. I am also familiar with large crowds from having attended a thousand rock festivals and NASCAR events in my life. I also know the size of an acre of land from decades in the real estate business. I'm very good at estimating both land and numbers of people in a crowd.

I can EASILY say there was more than 100,000 people at the rally. Beyond this, I don't know. I didn't walk the entire perimeter of the crowd. But I know that 100,000 is an absolute minimum. I saw acres of people, densely packed people just from my small vantage point of the field.

Let me also thank Glenn Beck for all his work and energy. I enjoyed the event immensely. I see the cynics in so many quarters speculating endlessly about Glenn Beck's motives in promoting this self described spectacle, especially on that given historic day. To this, I say so what? I had fun at the rally and so did hundreds of thousands of other people, all of whom heard an essential message that the country needs hearing. Who cares what Glenn Beck's motives really are? He deserves applause for making the nation think and for giving me a weekend of fun.

But since this is a real estate blog I will stick to the rental property implications only.

I have met hundreds of people through my InvestingInLand.com website and in my normal business life who have built their retirement plans on the ownership of rental properties. This is, of course, an admirable and prudent program. Counting on future price appreciation and increases in cash flows over years means a nice income when it is time to put down the briefcase and pick up the golf clubs.

But with the birth rate at about the same level as when the Wright Brothers were launching flying machines at Kitty Hawk, I can only ask WHO will be living in all those rental units and buying all those retirement rental properties from their owners?

This is simple demographics. The U.S. population will continue to grow through immigration, and especially illegal immigration, but the U.S. birth rate and all its social implications will greatly affect all investment markets and business models, from people who sell baby things like diapers and cribs, to owners of condos and buildings they want to rent, in say twenty or thirty years.

Remember we are talking about 2030 and 2040 here, when most baby boomers have either retired or are about to retire.

It should also be noted that the concept of "sub-replacement fertility" has entered the debate. It is a term and idea that you absolutely must know.

The declining birth rate worldwide but especially here at home has grave implications for America and, sadly to say, in the end the implications for real estate are just feathers in a hurricane.

So today I ask, where are all the get-rich-quick creative real estate guru geniuses when you need them?

When are all the flipping property gurus, the short sale experts, the foreclosure specialists? Where are all the real estate wizards, the millionaire makers, the investment brainiacs who can turn water into wine, lead into gold, and the worst real estate market in nearly 100 years into the financial bonanza of a lifetime?

Why don't these phonies update their websites and make clear that their testimonials are years out of date, as if they were ever true in the first place?

Why don't these self-described real estate investor millionaire success stories admit how much money they have lost in the last three years holding their rental properties, if they ever owned any such properties in the first place?

Why don't these frauds admit they induced millions of people to invest in the worst real estate market in history and are responsible to some extent for the greatest financial loss in the history of civilization and the near destruction of the American middle class?

How can so many people be so repeatedly wrong and still have the audacity to sell products proclaiming to be financial wizards and internationally known experts?

Mr. Boehner, smelling blood in the water, will likely be Speaker of the House after the midterm elections this fall and is making the right call. These guys, along with Fed Chair Ben Bernanke, need to go home and get real jobs. They have proven they don't know how to run a $15 trillion economy let alone a Burger King restaurant outside Fargo, North Dakota.

I have been calling for Bernanke and Geithner to be fired for some time, since the earliest days of this blog in fact. Check out this post from November 2009 as one example. I am truly satisfied that the senior Republican leadership in the House now agrees with me and is saying so publicly.

The U.S. economy is getting worse, not better. The Fed and the Congress have done all the stimulating they can to no effect. They have delayed the inevitable downturn but have not prevented it. I see no encouraging news to report on any front, and trust me when I say I'm looking everywhere.

I see this case as the catalyst for what is likely to come next, in waves. The SEC did a great job on this case and should be commended for following through with this type of action.

Public sector defaults and bankruptcies, cities and towns and even state governments unable to pay their own bills.

With many of these governments resorting to fraud and other "creative" accounting to fudge the official numbers while ignoring the obvious, that a government can only spend as much as it takes in over time, and that borrowing long to raise money to pay operating expenses is a recipe for financial suicide.

What began with Lehman Brothers and the subprime mortgage crisis quickly spread worldwide.

Federal and state governments across the world have overspent while undercollecting tax revenue.

1. Existing home sales are 80% of the U.S. residential real estate market.

2. The summer is the peak buying season for shoppers eager to find new homes before Labor Day.

3. Interest rates are at historic record lows. Some mortgages are now in the 3% range. 4% is common.

4. Sellers are already heavily discounting their home prices, including 10% or more since January 2010.

If you can't sell real estate under these conditions, when can you?

The answer is, of course, when the unemployment rate falls by about half from its current level, when the Federal government stops meddling in the economy which has put a chill on all economic growth (especially corporate spending), and when the current housing inventory is absorbed.

The last point will take about four years at current rates. The first two points are up for grabs. I see no catalysts in sight that improve this situation anytime soon. NONE AT ALL.

If you look at the above chart, the bump up in 2009-2010 is from Mr. Obama's first time homeowner tax credit which expired earlier this year. Otherwise, the market is stagnant and will stay that way for what I fear will be years to come.

One in seven of all mortgages on all the residential properties in the United States, that's 14.28%, are either delinquent or in foreclosure.

As this article suggests, yes there are bargain hunters about. But cash is king these days. There are many subject-to and other deals being done, many many of them. People are desperate and will do ANYTHING to get out of a monthly payment or stay in a house.

But the bargain hunters I see are looking for cheap houses and paying cash for them. No condos. Even townhouses are marginal.

The real bargains are in single family homes in subdivisions near public transportation.

If you can find one of those, you have it made in terms of rentability, cash flow, and appreciation.

Interest rates are cheap but mortgage money is tight. I don't see a rush in buying in most markets anyway. A double dip recession has either begun or will about to any day soon, spreading like a soft wave across the country from local market to local market, including one probably near you.

And of course that is what Mr. Frank is proposing. Not a hybrid public-private partnership for the mortgage market like F&F were originally designed to be but a PUBLIC option. Think ObamaCare for residential real estate.

The idea of Barney Frank preaching on the failures of F&F is beyond absurd, like Alice in Wonderland on a bad LSD trip. It was Barney Frank and Senator Chris Dodd who expanded the role of Freddie and Fannie to encourage low income home ownership. They are responsible, in part, for much of the mortgage meltdown mess the nation has experienced over the last few years. They screwed up and now blame everyone but themselves.

You would think these guys would have learned a lesson on what happens when the Federal government gets involved in a private capitalist market like real estate.

F&F have wallowed in accounting scandals for a decade now. I remember urging investors to short the mortgage twins back in 2005 and I was right. Mr. Frank is correct that F&F need to go. The question is what replaces them? In the current political climate it is not going to be a private organization like the NYSE or the CBOT but instead just another huge Federal bureaucracy destined to run America's mortgage market like the Post Office delivers the mail.

It's obvious that when the only support for the economy is excessive fiscal and monetary stimulation, withdrawing that support will make it fall. Think about what happens when you see an old man walking with a cane and then kick the stick out from under him.

SPLAT.

So the media, like this quite good article from the financial website 24/7 is now talking about the potential for a double dip recession. But guess what? It's already here. What do you think all these recent weak economic data numbers suggest? A future recession? Sorry to bring you the bad news but the future is here and she's angry, mad, and hungry to eat all the jobs and government cash in sight.

Investors need to plan for the double dip right now. If you are a bull, you are going to get gored.

Friday, August 13, 2010

Helicopter Ben Bernanke, was all giddy and smiles this spring like a teenage girl headed to her first prom. This was Recovery Summer and all his brilliant work at the Fed had saved the world economy just like Superman rescues Lois Lane and he was destined for sainthood alongside Gandhi and the Apostle Paul.

Well, it's the middle of Recovery Summer and the economic numbers are getting worse by the day.

So Bernanke, pulling the last arrow from his monetary quiver, has announced that the Fed will start buying government debt with mortgage principal repayments. With interest rates stuck at zero percent and the Fed's windows open wide for borrowers like a New Orleans bordello during Mardi Gras, Bernanke is betting that even more stimulus will finally get the economy moving forward---even when trillions of dollars has not budged the U.S. economy one inch. Check out the chart above for the U.S. unemployment rate since the real estate bubble burst. Doesn't look like much progress to me.

Of course, the problem with the U.S. economy is not a shortage of capital. It is uncertainty. And even Kansas City Fed President Thomas Hoenig is making the point that Bernanke's zero interest rate and loose money policies are feeding the perception that the economy is weak and headed towards collapse.

But Helicopter Ben is not listening to them. Nor is he listening to investors like Greenlight Capital founder David Einhorn who is betting on the "death spiral" effect of a currency when the central bank foolishly buys debt with its own principal. This is not just throwing good money after bad, this is selling your home to buy scratch off lottery tickets. If you think the Fed's balance sheet is a mess now, and it is, just wait a few months and see what a train wreck really looks like.

When will the get-rich-quick creative real estate gurus admit they were wrong? Where are the flipping property geniuses who promised America the secrets of instant wealth for $495 now? Where are the foreclosure rescue fraud scammers who cheated some single mother or old person out of their home and its equity---only to see all the equity now gone?

As I have been CORRECTLY saying for years, we are looking at the worst possible economic option imaginable.

Unemployment drives more home sellers to cut price

NEW YORK (Reuters) – Owners cut prices on one-quarter of U.S. homes listed for sale in July, a fourth straight monthly rise, as job market fallout trumped record low mortgage rates, real estate website Trulia.com said on Wednesday.

Sellers in the 50 largest cities slashed $30.1 billion from prices on houses on the market as of August 1, up from $27.3 billion in the prior month, San Francisco-based Trulia said in a report provided to Reuters before official release.

Unemployment near 10 percent, wage cuts, restrictive lending practices and home values that have fallen below their mortgage balances have left many potential buyers unable to take advantage of low rates.

"With one out of every four homes experiencing at least one price reduction, sellers are feeling no relief this summer in a market climate of fewer qualified buyers and widespread uncertainty about the job market," said Pete Flint, Trulia chief executive.

The average discount on homes reduced at least once held at 10 percent from the original asking price in July from June.

"If buyers are unqualified to buy, it doesn't matter how low interest rates are or how discounted a home is," Flint said in a statement, adding that the housing market will bounce around the bottom for months.

Unemployment remained at 9.5 percent in July but would have been higher if discouraged Americans had not dropped out of the workforce.

The housing market is still gaining equilibrium in the aftermath of up to $8,000 in buyer tax credits that ended on April 30. The credit forced sales into spring months at the expense of summer activity.

During the spring sales rush, sellers cut prices by much smaller amounts totaling $22.8 billion in March and $25 billion in April, according to Trulia.

U.S. 30-year mortgage rates averaged 4.56 percent in July, according to home funding company Freddie Mac, and have since drifted to a record low under 4.50 percent.

Nonetheless, in half of the 50 largest cities, sellers last month lowered prices on at least 30 percent of the homes for sale. Foreclosures continue to weigh on prices.

The real estate market will keep languishing until the job market recovers, said Trulia's Tara Nelson.

"Sellers need to continue to be very aggressive with pricing to compete against all the low-priced short sales and foreclosures that they'll be on the market with, for a long time to come," she said.

Minneapolis led in price cuts for a fourth straight month, with 42 percent of listings lowered at least once. The average discount was 9 percent for a total of $33.8 million in reductions, Trulia said, citing rising inventory and mounting competition.

Las Vegas had the biggest spike in the share of sellers cutting prices at 18 percent, a 56 percent surge, while New Yorkers cut prices on 20 percent of the listings, a 15 percent jump in the month.

Cities in California were among those with the largest increases in the share of sellers slicing prices.

Price-cutting on luxury homes listed at $2 million or more had an average discount of 14 percent from the original listing price, Trulia said. Homes in this category account for less than 2 percent of total inventory, but almost one-quarter of the total dollars slashed from asking prices.

Saturday, August 7, 2010

For many years I have highlighted the bizarre statements and reckless opinions of Former Fed Chairman Alan Greenspan. While most of official Washington and the mainstream media knighted him as "Sir Alan" and recommended him for sainthood, I pointed out he was an academic fool who really had no good advice to offer anyone, let alone the financial markets, and was in over his head pretty much every time he opened his mouth.

But today, in retirement, playing 39 hours of tennis per day which is his one true love in life, the 84-year old amateur economist still needs to stick his nose back into the political tent. Only these days people feel no reservation about slapping his snout and shoeing him away like an unruly puppy dog in search of a rubber bone.

Just this week, Greenspan, supposedly a lifelong Republican, urged not for just the repeal of the 2007 Bush tax cuts but ALL of the Bush-era cuts going back to 2003. This puts him far to the left of even Mr. Obama who only wants the "Tax Cuts for the Rich" to lapse in January 2011.

So, I guess, the way to solve the lack of consumer demand in the economy is to tax the hell out of the very same people who are currently not spending any money at all. The way to encourage real estate investment, business development, and job creation is to financially rape the very same people who need their own capital to accomplish these goals.

If this idea sounds dumb, it should. Welcome to the world of Alan Greenspan, where for years people confused "Greenspeak" for genius instead of the intellectual slop it really was.

This is like saying before you start to make money you have to lose a lot more.

There have been many great U.S. Treasury Secretaries in the past history of the United States.

Alexander HamiltonSalmon P. ChaseAndrew MellonHenry Morgenthau

Timothy Geithner will never be on this list. If I didn't know better, I'd swear he's demonstrating the best self-parody of a Treasury Secretary in history.

The calls for his resignation are from the right and left. Here's a great article from the Huffington Postproving his need to go is not partisan. Everyone from across the political spectrum realizes this hack needs to leave Washington and go where he can do no more harm, say an igloo in Northern Alaska.

The U.S. economy and especially the U.S. real estate markets cannot recover at the rate necessary for national survival and prosperity with Geithner at the top of Treasury. He may be a nice man who loves old people and puppy dogs but as a financial professional he's illiterate and says things that would make even Yogi Berra wince.

It is almost certain that the extremely high levels of home ownership evidenced over the last few years of the Bubble will never occur again. This is especially true after the recent Obama financial reform bill that will act as a brake on mortgage issuance, in other words, protecting consumers from their own spending even if they can actually afford the payments.

While it is true that home ownership has always been the American dream, the government's method for boosting this key psychological consideration has been flawed and disastrous. The loose money from the Fed, even looser underwriting standards from Fannie and Freddie, the push under the CRA to get renters in poor areas to buy homes, and more truly dumb government interference in the real estate market artificially pushed the homeownership rate far beyond any rational measure, at least one linked to responsible financial discipline.

The high water mark on American homeownership was reached in 2007 and likely will never reach that level again. This is not necessarily a bad result, since owning a home takes discipline and should be earned by constant savings, paying your bills on time, and otherwise demonstrating that you EARNED the right to the American dream, and not merely been given a piece of the country because you can fog up a mirror and sign a mortgage agreement.